General Motors earnings unlikely to rattle structured investors, linked products likely to continue: insider

By Kenneth Lim

Boston, Feb. 12 - General Motors Corp.'s lackluster results are unlikely to rattle most investors of recently launched reverse products linked to the automaker's common stock, a market insider said.

"I think most of the recent products have had pretty generous cushions for investors," a New York-based structurer said. "GM is one of those names right now that most investors wouldn't be very comfortable investing in if there isn't sufficient downside protection."

General Motors on Tuesday reported a loss of $38.7 billion, its largest annual loss ever, and sought to reduce costs by offering 74,000 U.S. hourly workers buyout packages. The Detroit-based car maker also said it does not expect significant earnings before 2010.

General Motors stock (NYSE: GM) fell 1.92%, or 52 cents, to close at $26.60.

Equity analysts were cautious about the results.

"Despite progress and buoyant markets outside the U.S., falling volumes and competitive pressures in the U.S. will continue to pressure GM in North America," Lehman Brothers analyst Brian Johnson wrote in a note.

The structurer said he was not aware if Tuesday's stock decline triggered any knock-in levels but said most of the recent GM-linked products were probably still above water.

"I don't look at GM specifically, but I suspect that a number of people are expecting bad news, or at least a lack of good news, to continue there for some time," the structurer said. "If you're coming out with a GM reverse convertible, you can't be too aggressive. There will always be some people with enough of a risk appetite to take some of those [more aggressive] products, but most of the investors out there will be more cautious."

Indeed, some of the most recent GM-linked products have not triggered their knock-in levels.

ABN Amro Bank NV on Tuesday priced $2.5 million of 16.9% Knock-in Reverse Exchangeable Securities due Feb. 13, 2009 linked to GM. The securities have a protection level at $12.90, or 50% of the initial price of $25.80.

ABN Amro Bank NV on Monday also priced $6.5 million of 16.5% Knock-in Reverse Exchangeable Securities due Feb. 15, 2009 linked to GM common stock. That series also has a protection price of $12.90, or 50% of the initial share price of $25.80.

Meanwhile, Royal Bank of Canada on Monday priced $607,000 of 25.5% reverse convertibles due May 13, 2008 linked to GM stock. Those notes have a protection price of $19.35, or 67.9% of the initial stock price of $28.50.

The structurer said some investors may now find GM-linked reverse convertibles even more attractive.

"If you think the market's pretty much priced in all the bad news and you think it can't get that much worse for the next year or so, there's a number of products out there that will be pricing based on current stock prices, and you might think they're pretty attractive at this time," the structurer said.

But the structurer cautioned that reverse convertibles can come in a wide risk spectrum.

"Depending on who they're targeting, some of the products can have protection levels at 50%, 60%, 70%," the structurer said. "70% of $26 isn't that far away for a company like GM."

More GM-linked deals ahead

Recently launched GM-linked products expected to price include Barclays Bank plc's 16% reverse convertibles due Aug. 29, 2008 that will carry a knock-in level at 60% of the initial share price. The notes are expected to price Feb. 26.

JPMorgan Chase & Co. also plans to price 14% reverse exchangeable notes due Feb. 27, 2009 with a 50% protection level. Pricing is slated for Feb. 26.

The structurer said GM will likely continue to be a popular name among structured offerings.

"The volatility in the name is what makes it interesting," the structurer said.

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